Contents
Investors should consider S&P Global Inc. (SPGI) if interested in a high quality growth stock in which to invest for the long-term.
Summary
- SPGI released its Q4 and FY2018 results and provided FY2019 guidance on February 7th.
- It benefits from a wide economic moat and an asset-light business model.
- SPGI is one of very few companies which have continually increased its dividend for 45+ consecutive years.
- The quarterly dividend was just recently increased 14% and the compound annual growth rate during the 2006 – 2019 timeframe is in excess of 9%.
- SPGI is an attractive long-term investment for investors not seeking a high dividend yield; SPGI’s current dividend yield is ~1.17%.
- I am patiently waiting to add to my position as I anticipate another broad market pullback.
Introduction
Readers unfamiliar with the extent of S&P Global Inc.’s (SPGI) extensive operations are encouraged to review the 2018 Investor Fact Book.
Many investors think of SPGI solely as a ‘ratings’ company, but operations consist of 4 reportable segments. By holding a commanding percentage of the global ratings market, SPGI has a relationship with companies to which it can cross-sell services provided by the following:
SPGI held its Global Investor Day on May 24, 2018 and supporting information can be found here.
The following images provide a high level overview of the extent to which SPGI has grown since 2011 and the current magnitude of SPGI’s business.
Source: SPGI – May 24 2018 Investor Day Presentation
Over the past few years, SPGI has invested in growth and efficiency-enabling technologies so as to create shareholder value. It has transformed its business with a focus on reorienting its portfolio in favor of ‘growth assets’. This has resulted in shareholder returns far in excess of that generated from an investment in the S&P500 and from that generated by SPGI’s Peer Group.
Source: SPGI – May 24 2018 Investor Day Presentation
Investments continue to be made to improve SPGI’s product offering, to introduce new technology, and to enter new geographies. The following image depicts the framework that SPGI is following to maximize shareholder value.
Source: SPGI – May 24 2018 Investor Day Presentation
SPGI is committed to returning at least 75% of annual free cash flow to shareholders each year while maintaining flexible debt capacity.
Source: SPGI – May 24 2018 Investor Day Presentation
In addition to the Investor Day presentation for which I have provided a link earlier in this article, I encourage you to read items 1 and 1a) in SPGI’s recently released FY2018 Form 10-K. These sections provide an overview of SPGI’s business and the primary risks and uncertainties that could materially and adversely affect the business, financial condition, and results of operations.
At the time of my March 4, 2018 article I came to the conclusion that SPGI was overvalued and suggested investors patiently wait for a better entry point.
Fast forward to my follow up article on October 26, 2018 and I expressed my opinion that SPGI shares were fairly valued. On this basis I disclosed that I had just acquired 200 shares for the ‘side accounts’ within the FFJ Portfolio; the purchase price was ~$175.88/share.
Fast forward to February 7, 2019 and SPGI has released Q4 and FY2018 results and FY2019 guidance. It has also announced an increase in its quarterly dividend.
I now take this opportunity to revisit SPGI to determine whether the current ~$195 share price relative to FY2019 guidance provided by SPGI is such that the acquisition of further shares is appropriate.
Q4 and FY2018 Results
SPGI’s Q4 and FY2018 results can be found here.
The return of volatility and uncertainty to the markets in 2018 caused by rising interest rates, trade negotiations, Brexit and the unwinding of global monetary stimulus impacted debt issuance and thus affected SPGI’s Ratings business. SPGI’s remaining 3 businesses, however, performed well thus enabling the company to deliver strong financial results.
In fact, SPGI’s performance surpassed the targets it provided at its May 24 2018 Investor Day.
Source: SPGI – Q4 and FY2018 Earnings Presentation – February 7, 2018
Revenue increased 3% despite a 4% decline in SPGI’s Ratings segment.
Adjusted operating profit increased 8%, and adjusted operating profit margin increased 230 bps to 48.8%.; at SPGI’s Investor Day an adjusted operating profit margin target in the low 50s over the next 3 - 4 years was communicated.
Revenue growth and productivity efforts propelled the adjusted operating profit margin in 2018.
Revenue declined in the Ratings segment of SPGI due to reduced issuance. Despite this decline, Ratings delivered greater margin improvement than any other segment.
Source: SPGI – Q4 and FY2018 Earnings Presentation – February 7, 2018
SPGI’s target is to return at least 75% of free cash flow, excluding certain items, to shareholders but in FY2018 it returned more than 100%.
SPGI generated significant margin improvement in every business and reported $2B in free cash flow, excluding certain items; this was an 8% YoY increase.
In Q4, SPGI took advantage of the decline in its stock price and repurchased shares which resulted in a ~2.2% reduction in diluted weighted average shares outstanding relative to FYE2017; SPGI has reduced the outstanding shares by ~10% over the past 5 years.
$1.7B in share repurchases and $0.503B in dividends was returned to shareholders in FY2018.
While revenue growth, margin improvement and share count reduction contributed to the 23% increase in adjusted EPS, roughly half of the increase in 2018 was the benefit U.S. tax reform on SPGI’s effective tax rate.
On January 2, 2019, SPGI completed its $0.5B accelerated share repurchase (ASR) program which it had announced in October 2018. In late January 2019, SPGI initiated a new $0.5B ASR program that will conclude no later than July 2019.
FY2019 Guidance
The following reflect SPGI’s guidance for FY2019.
Source: SPGI – Q4 and FY2018 Earnings Presentation – February 7, 2018
SPGI plans to invest $90 - $110 million in new projects (up from $60 million in 2018) to generate additional future organic growth.
Credit Ratings
There has been no change in SPGI’s long-term senior unsecured credit ratings subsequent to my October 26th article.
Moody’s upgraded S&P’s long-term senior unsecured credit rating from Baa1 to A3 on August 8th.
Fitch upgraded S&P’s long-term senior unsecured credit rating from BBB+ to A- on October 12th.
Both ratings are the lower tier of the upper medium grade category and are satisfactory for my purposes.
Free Cash Flow (FCF)
When SPGI released FY2018 guidance on February 6, 2018 it projected adjusted FCF for the year would be ~$2.3B. This guidance was lowered to ~$2.2B when Q3 results were released October 25, 2018.
With the release of FY2018 results we now see that cash provided by operating activities was ~$2.06B and FCF was ~$1.80B, an increase of $15 million from 2017.
Source: SPGI – Q4 and FY2018 Earnings Presentation – February 7, 2018
Free cash flow excluding certain items in FY2019 is expected to be $2.2B - $2.3B.
Valuation
In my October 26th article, SPGI had forecast full year diluted EPS of $7.77 - $7.87 and full year adjusted diluted EPS of $8.50 - $8.60. At the time, SPGI was trading at $177.17 thus giving us a forward diluted PE range of ~22.5 - ~22.8 and a forward adjusted diluted PE range of ~20.6 - ~20.84.
We now know that SPGI generated $7.73 diluted EPS and with SPGI currently trading at ~$195 we get a diluted PE of ~25.23.
SPGI has now provided guidance in which reported revenue is expected to increase mid single-digits; FY2019 full year diluted EPS of $8.50 - $8.70 and full year adjusted diluted EPS of $8.95 - $9.15 is now projected.
With SPGI currently trading at ~$195 and using the mid-point of the projected ranges reflected above we arrive at a forward diluted PE of ~22.67 and a forward adjusted diluted PE of ~21.55.
Dividend, Dividend Yield, and Dividend Payout Ratio
SPGI’s dividend and stock split history can be found here.
SPGI has recently announced a $0.07 increase in its quarterly dividend to $0.57/share. On the basis of the current ~$195 share price investors are receiving a ~1.17% dividend yield. SPGI, however, is not a stock you acquire if your primary objective is to generate income. This is a stock for investors primarily seeking growth with income being secondary.
You may wish to check out this site and to enter various start and/or end dates and to compare SPGI’s performance relative to an index or another stock symbol.
The following image reflects SPGI’s performance relative to the SPDR S&P 500 ETF over a 10 year timeframe.
SPGI has paid a dividend each year since 1937 and it is one of fewer than 25 companies in the S&P 500 that has increased its dividend annually for at least the last 45+ years.
The following compound annual dividend growth rate is provided with the inclusion and with the exclusion of the $2.50 ‘special dividend’ in 2012.
The projected $2.28 annual dividend is well covered by the projected FY2019 full year diluted EPS range of $8.50 - $8.70.
The diluted weighted-average number of common shares outstanding as at FYE 2016 – 2018 amounted to 265.2, 258.9, and 253.2 million. By comparison, there were ~313 million shares outstanding as at FYE2009!
As previously noted, SPGI has recently completed its $0.5B accelerated share repurchase (ASR) program which it had announced October 2018. In late January 2019, SPGI initiated a new $0.5B ASR program that will conclude no later than July 2019.
Final Thoughts
SPGI does not currently fall within my top 30 holdings which I discussed in this article.
I do like the company and intend to increase my exposure but I have decided to patiently wait for its share price to pull back to $180 or below.
SPGI is certainly not grossly overvalued but I just don’t think the time to acquire shares is when share prices have experienced a rapid run up within a very short time frame.
I am reasonably confident some event(s) will trigger another broad pullback and have decided to patiently sit on the sidelines and to monitor SPGI (amongst other companies) before adding to my position.
I wish you much success on your journey to financial freedom.
Thanks for reading!
Note: I sincerely appreciate the time you took to read this article. Please send any feedback, corrections, or questions to [email protected].
Disclaimer: I have no knowledge of your individual circumstances and am not providing individualized advice or recommendations. I encourage you not to make any investment decision without conducting your own research and due diligence. You should also consult your financial advisor about your specific situation.
Disclosure: I am long SPGI.
I wrote this article myself and it expresses my own opinions. I am not receiving compensation for it and have no business relationship with any company whose stock is mentioned in this article.
